Central bank of South Korea moves to curb lending - Business - International Herald Tribune

SEOUL — The Bank of Korea on Thursday raised reserve requirements on banks for short-term deposits for the first time in almost 17 years. The move was aimed at curbing lending, which has helped send housing costs skyrocketing and contributed to a major political hurdle for President Roh Moo Hyun.

From Dec. 23, financial institutions will be required to put aside 7 percent of their outstanding "demand deposits," the money that bank customers can withdraw on immediate notice, the central bank said. The reserve ratio had been steady at 5 percent since February 1990.

The South Korean government has been under intense public pressure to control rising housing prices, which rank among the most expensive in the world. Apartment prices in Seoul last month rose more than six times faster than the inflation rate. Seoul and the surrounding Kyonggi Province are home to nearly half of South Korea's population of 48 million.

Politicians in South Korea have called on the central bank to raise its benchmark interest rates to make loans more costly. But the bank has refused, for fear that doing so would hurt the overall economy, which is showing signs of a slowdown.

But the move Thursday to curb liquidity, and thus reduce funds available for mortgages, showed that the bank was concerned about real estate prices, said Hong Sun Young, a senior economist at the Samsung Economic Research Institute, a private organization in Seoul.

"The economy has been slowing down since the first quarter of this year," Hong said. "The central bank could not raise interest rates. Raising the reserve ratio was the only option that they had."

Still, experts draw a distinction between problems with skyrocketing housing prices in South Korea, which appear to be concentrated in certain prized areas around Seoul, and the real estate bubble that drove up land prices throughout Japan in the late 1980s and early '90s.

The subsequent bursting of that bubble sent the Japanese economy into a tailspin from which it has only recently emerged. South Korean banks are better protected against the potential burst of a real estate bubble, experts say, because their mortgage loans are only up to 60 percent of the real estate prices.

But that is little comfort to South Koreans, who have been complaining for years about high housing costs in the area. Opinion surveys show that many South Koreans accuse the Roh government of failing to keep its promise to get housing prices back under control.

Soaring housing prices have created a trend of buying houses as investments and have compelled wage earners to dig deeper, or wait longer, to buy a home.

Many also fear that the trend will undermine financial stability and hurt economic growth by reducing disposable income and consumption.

China needs local demand

The central bank of China must spur domestic consumption and limit China's trade surplus by reducing the nation's savings or by doubling the global average, Bloomberg News quoted a senior official as saying Thursday in Beijing.

"The high savings rate and low consumption" are economic challenges that "can't be solved in the short term," said the official, Su Ning, deputy governor of the People's Bank of China. "China will have to work on expanding domestic demand."

Prime Minister Wen Jiabao is trying to encourage domestic consumption to help reduce China's trade surplus, which is expected to widen this year to a record $140 billion, according to a Commerce Ministry forecast.

The trade surplus has flooded China with cash, increased its money supply and undermined the central bank's attempts to curb investment.